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825 F.

2d 351
56 USLW 2164, Fed. Sec. L. Rep. P 93,363

Bernice Barbour RAIFORD, Plaintiff-Appellant,


v.
BUSLEASE, INC., Merrill Lynch, Pierce, Fenner & Smith,
Inc.,
and Thomas F. Morris, Defendants-Appellees.
Morgan B. RAIFORD, Plaintiff-Appellant,
v.
BUSLEASE, INC., Merrill Lynch, Pierce, Fenner & Smith,
Inc.,
and Thomas F. Morris, Defendants-Appellees.
Nos. 86-8514, 86-8515.

United States Court of Appeals,


Eleventh Circuit.
Aug. 24, 1987.

James A. Parker, Atlanta, Ga., for plaintiff-appellant.


Paul W. Stivers, Rogers & Hardin, Atlanta, Ga., for defendants-appellees.
Appeals from the United States District Court for the Northern District of
Georgia.
Before HILL and HATCHETT, Circuit Judges, and HENDERSON,
Senior Circuit Judge.
HENDERSON, Senior Circuit Judge:

Dr. and Mrs. Morgan B. Raiford brought separate suits in the United States
District Court for the Northern District of Georgia alleging, among other
causes of action, that the defendants violated Sec. 5 of the Securities Act of
1933, 15 U.S.C. Sec. 77e, by selling securities for which a registration
statement was not in effect. The plaintiffs sought rescission of their purchase

and recovery of the consideration paid to the defendants in accordance with


Sec. 12(1) of the Act, 15 U.S.C. Sec. 77l (1). The district court, finding the
plaintiffs' Sec. 12(1) claims barred by the strict one-year limitation period of
Sec. 13 of the Act, 15 U.S.C. Sec. 77m, granted the defendants' motions for
partial summary judgment. We reverse.
2

The Raifords maintained separate securities accounts with the Atlanta office of
Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch). Thomas F.
Morris, a vice president with Merrill Lynch, acted as the Raifords' account
manager and advisor. In early 1981, Merrill Lynch became the placement agent
for a program offered by BusLease, Inc. known as the "Intercity Bus
Management Program 81-1" (Program). Investors in the Program purchased
forty-foot intercity buses from the manufacturer pursuant to arrangements made
by BusLease. Although the investors were the nominal owners of the buses,
BusLease, under a Management Agreement, undertook to handle the leasing,
maintenance and all other aspects of the ownership of the buses. The investors
shared pro rata in the profits and liabilities of the bus fleet managed by
BusLease. Because BusLease intended that the Program meet the requirements
of the private placement exemption,1 no registration statement was filed with
the Securities Exchange Commission.

On Morris' recommendation, the Raifords decided to invest in the BusLease


Program. On March 13, 1981, Dr. and Mrs. Raiford each executed four
documents committing them to the BusLease deal, including (1) a Bus
Purchase Contract, (2) a Management Agreement, (3) a Standby Management
Agreement and (4) a Purchaser's Representations and Undertakings. There is a
conflict in the testimony as to the method of financing the investment decided
upon at this meeting. The Raifords contend that Morris assured them that the
entire amount of the proposed investment would be borrowed from a financial
institution without any cash outlay from the Raifords. Morris claims that
merely a portion of the investment was to be funded by loan proceeds.

Of the four subscription documents, only the Purchaser's Representations and


Undertakings, designed to enable BusLease to judge the business acumen and
sophistication of the Raifords as required by the private offering exception,
mentions the financial arrangements for the transaction. One of the options
available in that document, to be designated by check mark, is the payment in
full of the subscription price from cash and marketable securities in the
subscriber's account with Merrill Lynch. The Raifords' documents indicate that
method of payment. It is undisputed that this section of the Purchaser's
Representations and Undertakings was left blank when Dr. and Mrs. Raiford
affixed their signatures. Although Morris admits filling in the other blanks on

the document, he denies electing the provision stating that the purchase of the
securities would be paid for by a deduction of $315,000.00 from each of the
Raifords' securities accounts. The parties agree, however, that the Purchaser's
Representations and Undertakings was completed while in the possession of
Merrill Lynch.
5

Merrill Lynch forwarded the subscription documents to BusLease. BusLease


accepted the Raifords as investors in the Program "as of May 20, 1981." Twothirds of the investment price came from a loan provided by Chem Credit, the
escrow agent for the Program, and the remainder from the Merrill Lynch
securities accounts maintained by the Raifords. The transfer of funds and the
transfer of title to the buses was accomplished on May 28, 1981.

On May 25, 1982, Dr. and Mrs. Raiford filed substantially identical complaints
in federal district court. The cases were subsequently consolidated. The original
complaints alleged violations of section 5 of the Securities Act, 15 U.S.C. Sec.
77e, and sought rescission of the transaction and recovery of the consideration
paid pursuant to the provisions of section 12 of the Securities Act, 15 U.S.C.
Sec. 77l. Count Two complained of breach of fiduciary duty and fraud under
Georgia law. The complaints were amended to add a third count stating a cause
of action under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.
Sec. 78j(b), and Rule 10b-5.2 In June, 1985, the court granted the defendants'
motion for partial summary judgment as to Count One of the complaint. The
court ruled that the claims asserted under section 12(1) in Count One were
barred by the one-year limitation period mandated by section 13 of the
Securities Act. Finding that the date of contract constituted the sale triggering
the running of the statute of limitations, the district court determined that such
an agreement became binding on the parties on May 20, 1981 when BusLease
accepted the subscription documents signed by the Raifords The court reasoned
that BusLease could have maintained an action for breach of contract against
the plaintiffs on that date and hence the rescission action brought by the
plaintiffs on May 25, 1982 was barred by section 13.

On appeal, the Raifords do not dispute that the date of a valid contract
constitutes a sale for the purposes of section 5. Rather, they contend that no
such binding commitment was effective on May 20, 1981 because BusLease
had actual and imputed knowledge through their agent Merrill Lynch that the
subscription documents did not reflect the offer made to Morris, acting as dual
agent in the transaction, because that offer was expressly conditioned upon
securing a full bank loan for the purchase price. The defendants reply that if
such an agreement between the Raifords and Morris did exist, the contract
created by BusLease' acceptance of the subscription documents may be

voidable for fraud, but nevertheless triggered the statute of limitations on the
rescission action. For the reasons set forth below, the resolution of the contract
issues raised by the parties is irrelevant to our decision in this case.
8

Section 12(1) of the Securities Act stipulates that any person who offers or sells
an unregistered security in violation of section 5 of the Act shall be liable to the
purchaser upon tender of the security, for the consideration paid plus interest,
less the amount of any income received from the security. Section 13 of the
Act, in part, provides: "No actions shall be maintained ... to enforce a liability
created under [12(1) ], unless brought within one year after the violation upon
which it is based." Thus, the prohibition on selling unregistered securities is
actually contained in Sec. 5(a) of the 1933 Act. Section 12(1) merely provides a
remedy for a violation of that section by authorizing recovery in a civil action
against any person who offers or sells a security in contravention of section
5(a). The statute of limitations continued in section 13 begins running on the
date of the act prohibited by section 5(a).

The violation alleged by the Raifords is covered by section 5(a)(1) which


makes it unlawful for any person, unless a registration statement is in effect as
to the security, "to make use of any means or instruments of transportation or
communication in interstate commerce or of the mails to sell such security
through the use or medium of any prospectus or otherwise...." The term "sell" is
given only the most general definition in the Securities Act. Section 2(3) of the
Act, 15 U.S.C. Sec. 77b(3), merely states that "[t]he 'sale' or 'sell' of a security
shall include every contract of sale or disposition of a security or interest in a
security for value." Although the definition sheds a rather dim light on the
meaning of "sell" in this context, it does at least indicate that the term, while
including contracts of sale, may be interpreted more broadly.

10

The district court cited no authority in support of its conclusion that the date of
contract was indeed the date of the sale which purportedly infringed on section
5. We glean from the pleadings and briefs in this case, however, that the court
followed the "commitment doctrine" approach developed by the Second Circuit
Court of Appeals in Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 890
(2d Cir.1972). Although this doctrine was formulated to determine when the
sale of a security takes place for purposes of a Rule 10b-5 action, a number of
district courts have engrafted its precepts onto a cause of action brought
pursuant to section 12(1). See e.g., Eriksson v. Galvin, 484 F.Supp. 1108, 1119
(S.D.N.Y.1980); Rochambeau v. Brent Exploration, Inc., 79 F.R.D. 381, 384
(D.Colo.1978). Under this view, the relevant date of the sale of a security is the
time when the parties enter into an agreement evincing a commitment to the
transaction, not when the securities or the purchase price actually change hands.

Radiation Dynamics, 464 F.2d at 890.


11

An analysis of the underlying rationale of the commitment doctrine leads to the


conclusion that while it may effectuate the goals of the securities laws in the
context of Rule 10b-5, the application of its restrictive interpretation of "sale" to
an action based on section 5 of the 1933 Act frustrates the broad remedial
purpose of the Act. As explained in Radiation Dynamics, the thrust of Rule
10b-5 is that an insider who has material inside information or a person who
has obtained such information from an insider may not use that information in
connection with the purchase or sale of securities to take advantage of his
knowledge at the expense of the person with whom the insider is dealing. Id. at
888. The duty to disclose or refrain from dealing based on material inside
information, however, persists only until the date of commitment to a securities
transaction. This is so because "[a] party does not, within the intendment of
Rule 10b-5, use material inside information unfairly when he fulfills
contractual commitments which were incurred by him previous to his
acquisition of that information." Id. at 890. The Rule 10b-5 goal of fundamental
fairness in the securities marketplace is preserved by use of the time of
commitment for fixing the date of sale. Id.

12

Section 12(1), by contrast, imposes what amounts to strict liability for a


violation of section 5 through the use of the mails or interstate commerce to sell
an unregistered security. Comment, "Reasonable Care" in section 12(2), 48
U.Chi.L.Rev. 372, 377 (1981). To establish a prima facie case of violation of
section 5, a plaintiff need allege only the sale or offer to sell securities, the
absence of a registration statement covering the securities, and the use of the
mails or facilities of interstate commerce in connection with the sale or offer.
Swenson v. Engelstad, 626 F.2d 421, 424-25 (5th Cir.1980). Section 12(1) will
allow a purchaser to recover his investment "regardless of whether he can show
any degree of fault, negligent or intentional, on the seller's part." Id. quoting,
Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680, 686
(5th Cir.1971). Therefore, the rationale supporting the district court's implicit
holding that the use of interstate commerce to complete the sale of the security
after the date of contract did not violate the Act, disappears. In fact, the
restrictive interpretation of "sell" utilized by the court in this case may hinder
an important purpose of the Act. By enacting section 12(1), "Congress sought
to encourage sellers of securities to register those securities prior to any sales or
offer to sell." Henderson v. Hayden, Stone Inc., 461 F.2d 1069, 1072 (5th
Cir.1972). Allowing recovery for sales activity after the date of contract
effectuates this legislative goal.

13

The Securities Act of 1933 must be interpreted broadly by the courts in order to

effectuate the congressional intent to protect investors. Securities and Exchange


Commission v. Carriba Air, Inc., 681 F.2d 1318, 1324 (11th Cir.1982); Herpich
v. Wallace, 430 F.2d 792, 806-07 (5th Cir.1970). Furthermore, the terms "sell"
and "sale" as used in section 5 are intended to be used in a broad sense. Roe v.
United States, 316 F.2d 617, 620 (5th Cir.1963). Consequently, we construe
section 5(a)(1) of the Act to prohibit the use of the mail or interstate commerce
to complete any integral stage of the sale of an unregistered security, including
remittance of the funds for the purchase. See McDaniel v. United States, 343
F.2d 785, 786-87 (5th Cir.) (violation of section 5(a) in mailing of confirmation
of sale) cert. denied, 382 U.S. 826, 86 S.Ct. 59, 15 L.Ed.2d 71 (1965); United
States v. Pollack, 534 F.2d 964, 972 n. 6 (D.C.Cir.) (use of mails to transmit
proceeds or confirmation of sale of unregistered securities violates section 5(a)
(1)), cert. denied, 429 U.S. 924, 97 S.Ct. 324, 50 L.Ed.2d 292 (1976); United
States v. Wolfson, 405 F.2d 779, 783-84 (2d Cir.1968), (section 5(a)(1)
violated when mails used to remit proceeds of sale of unregistered securities to
seller), cert. denied, 394 U.S. 946, 89 S.Ct. 1275, 22 L.Ed.2d 479 (1969).
14

On May 28, 1981, the defendants made use of instruments of interstate


commerce to transfer the purchase price of the securities from the escrow
account with Chem Credit and from the Raifords' securities accounts. This
event constituted an integral part of the sale of an unregistered security and
therefore violated section 5(a)(1) of the Securities Act of 1933. The plaintiffs
filed their complaint on May 25, 1982, within one year of that date. See
Hamilton Bank & Trust Co. v. Holliday, 469 F.Supp. 1229, 1237
(N.D.Ga.1979) (one year period of section 13 begins on date of last pertinent
activity alleged to violate Act). We therefore reverse the finding of the district
court that the Raifords' rescission claims are barred by the statute of limitations
set forth in section 13 of the Act. While the plaintiffs' causes of action have
been preserved by our application of the "most lenient standard" in deciding the
statute of limitations issue, Doran v. Petroleum Management Corp., 576 F.2d
91, 93 (5th Cir.1978), there remains for resolution in the district court the
question of whether the transaction was in fact exempt from the registration
requirements of the Securities Act.

15

REVERSED and REMANDED.

Section 4 of the Securities Act of 1933, 15 U.S.C. Sec. 77d provides in relevant
part:
The provisions of Section 5 shall not apply to--

....
(2) transactions by an issuer not involving any public offering.
2

Early in the litigation the defendants moved to refer the state claims to
arbitration as required by Customer Agreements signed by the plaintiffs and to
stay the federal securities causes of action pending a resolution of the
arbitration. The district court found that the state and federal claims were
intertwined so as to make it impracticable to separate out non-arbitrable federal
violations of the Securities Act of 1933 from arbitrable claims and therefore
denied the defendants' motion. On appeal, we affirmed based on the continued
viability of the intertwining doctrine in this circuit. Raiford v. BusLease, Inc.,
745 F.2d 1419 (11th Cir.1984). Soon after this decision, however, the Supreme
Court rejected this doctrine, Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213,
105 S.Ct. 1238, 84 L.Ed.2d 158 (1985) and the defendants renewed their
motion. The district court stayed proceedings as to Counts II and III of the
plaintiffs' complaints pending arbitration. The court's disposition of Count I
forms the basis of this appeal

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